Startup Boards: Getting the Most Out of Your Board of Directors

By Brad Feld and Mahendra Ramsinghani

An essential guide to understanding the dynamics of a startup's board of directors

Let's face it, as founders and entrepreneurs, you have a lot on your plate—getting to your minimum viable product, developing customer interaction, hiring team members, and managing the accounts/books. Sooner or later, you have a board of directors, three to five (or even seven) Type A personalities who seek your attention and at times will tell you what to do. While you might be hesitant to form a board, establishing an objective outside group is essential for startups, especially to keep you on track, call you out when you flail, and in some cases, save you from yourself.

In Startup Boards, Brad Feld—a Boulder, Colorado-based entrepreneur turned-venture capitalist—shares his experience in this area by talking about the importance of having the right board members on your team and how to manage them well. Along the way, he shares valuable insights on various aspects of the board, including how they can support you, help you understand your startup's milestones and get to them faster, and hold you accountable.

• Details the process of choosing board members, including interviewing many people, checking references, and remembering that there should be no fear in rejecting a wrong fit
• Explores the importance of running great meetings, mixing social time with business time, and much more
• Recommends being a board member yourself at some other organization so you see the other side of the equation

Engaging and informative, Startup Boards is a practical guide to one of the most important pieces of the startup puzzle.

• Language: English
• Publisher: Wiley
• Release date: Dec 9, 2013
• ISBN: 9781118516829

Book preview

Part One

Overview

Chapter One

Introduction

The word boardroom conjures up images of important people puffing on cigars or sipping Scotch while sitting in leather chairs in wood-paneled rooms. These important people are talking about complex things that determine the future of companies. Formality and seriousness fill the air. Big decisions are being made.

While first-time chief executive officers (CEOs) and founders often have an elevated view of the boardroom, great startup boards aren’t fancy, complex, or pretentious. Instead, a startup board is usually a small group of people trying to help build your company.

Over the years, we’ve served on hundreds of boards. A few were great, many were good, and some were terrible. When things in a company were going smoothly, the board was congratulatory and supportive. When there were challenges, some boards helped and some boards hurt. The tempo and interactions of these boards varied dramatically. In some cases reality prevailed, and in others it was denied.

In 2010, after a particularly tedious board meeting, Brad realized that the default structure of a startup board was an artifact of the past 40 years, dating back to the way early venture-backed company boards operated. Things had changed and evolved some, but the dramatic shift in communication patterns and technology over the past decade hadn’t been incorporated into the way most boards worked. As a result, Brad ran a two-year experiment where he tried different things; some successful, some not. As with every experiment, he did more of what worked, modified and killed what didn’t, tried new things, and measured a lot of stuff.

The idea for this book emerged during this experiment. We decided that in addition to describing the new startup board approach that resulted from Brad’s experiment, it was important to lay the groundwork and explain clearly how startup boards worked, how they could be most effective, and what the challenges were. Brad’s new board approach built on the traditional board of directors, so rather than throw it out, we use a highly functioning one as the basis for a new, evolved, and much more effective approach to a board of directors.

While the topic may feel dry, we’ve tried, as Brad and Jason Mendelson (Foundry Group, Managing Director) did in Venture Deals: Be Smarter Than Your Lawyer and Venture Capitalist, to take a serious topic, cover it rigorously, but do it in plain English with our own brand of humor. Our goal is to demystify how a board of directors works, discuss historical best and worst practices, and give you a clear set of tools for creating and managing an awesome board.

Why Does a Startup Need a Board?

Entrepreneurs, the creators and architects of creative construction (with apologies to Schumpeter¹), enjoy creating new products and companies from just an idea. These forceful personalities break new ground and explore uncharted territory while their unstoppable drive changes the world we live in. As a society, we should be grateful to the entrepreneurial force that creates new things, but often this new-new thing causes fear and uncertainty in the old and the established, followed by resistance and denial. Whether it is building a new product, landing the first customer, raising the initial round of capital, or recruiting early team members, an entrepreneur’s journey can be lonely, stressful, and extremely challenging. While entrepreneurship currently is popular—even trendy—this is not always the case, and the journey to create a successful company can be a long and difficult one.

One of the early challenges encountered is raising money. While many startups are bootstrapped, with the founders choosing to focus on generating revenue to fund their business, other entrepreneurs choose to raise money from friends and family, angel investors, or venture capitalists (VCs). The challenges of raising the first round of capital are well documented, and only a small percentage of startups get funded, either through sheer persistence or a stroke of luck.

Once this first round of capital is raised, a new set of challenges arises. Investors, driven by the desire for a substantial financial return, seek milestones, demonstrable progress, new rounds of financing at higher prices, or even quick exits. While some investors may be patient, taking a decade or longer view to helping build the company, others are more anxious to see quick progress. In many cases, these investors view the company as partly their own, which it in fact is, now that they’ve invested in it. Some of these investors are happy to support the entrepreneur in any way the entrepreneur needs them to. Other investors have their own view of what they, and the entrepreneur, should be doing—providing oversight, and adding value to the startup through their role on the board.

A long-standing cliché in the venture capital world is that VCs provide adult supervision to the entrepreneurs. We find this language to be pejorative and insulting to the entrepreneur and the company, so we try to avoid it. Instead of talking in abstractions, we’ll describe clearly what VCs and board members can do to be helpful to the companies whose boards they serve on. We’ll be equally direct about describing what entrepreneurs and management can do to engage these directors.

A board of directors can be created at the inception of the company and is almost always formed in conjunction with the first outside financing. Many early-stage companies never convene a board on a regular basis. In bootstrapped companies, the entrepreneurs have no outside investors so they often feel no need to create a board since they feel responsible only to themselves.

In all cases we think this is a mistake and believe you should form your board early in the life of your company, regardless of how you are financed. If you do it correctly, choose the right directors, and engage them actively, they can help you dramatically accelerate your business. Then when you run into trouble, they can help guide you through the tough spots.

Clint Korver (Ulu Ventures, Partner) teaches a course on startup boards at Stanford University called Startup Boards: Advanced Entrepreneurship. Clint says, "The most common mistake startups make is not having a board at all. He points out that research shows a majority of startups fail due to self-inflicted wounds—internal decisions about founding team, roles, equity, and other important issues. Founders who are overconfident or choose to avoid conflict often miss an opportunity to bring in fresh perspective and structure these decisions from appropriate individuals, says Clint. The other common mistake founders make is to populate the board with friends and family—you need to think carefully if they can address challenges or make decisions in the interest of the startup. Finally, often only founders populate the startups board—this often leads to confusion with respect to decision making and authority."

The Board Is an Extension of Your Team

The search for capital can be agonizing. When a term sheet is on the horizon, most founders are ecstatic that the long process of raising the venture round is almost over. During this process, many founders ignore the type of board members that come with the money. Smart founders understand that building a great company is all about the people and the members of the board are just as important as the early employees. If I was prepping my younger brother on a startup journey, I would tell him to raise money only from those investors who can strategically add value and emotionally connect with you to help you be better, says Foundry Group managing director Jason Mendelson.

Once you’ve taken investment from VCs, they will ensure their investment has some protection as a result of control provisions in the financing document. They’ll also have a governance role as a result of their board seat. But more importantly they become part of the company as a result of their role on the board. While founders and investors often fret over control issues, Union Square Ventures partner Fred Wilson points out, Boards should not be controlled by the founder, the CEO, or the largest shareholder. For a board to do its job, it must represent all stakeholders’ interests, not just one stakeholder’s interest.²

The best entrepreneurs construct a board of directors the same way they build their core management team, recruiting the best people they can find for the roles that are needed. A great board member can be a superb coach and mentor—pushing you to grow, encouraging you to take on bigger challenges, and ultimately reaching your highest potential. Like any great coach, he will be careful never to undermine you or jump in the driver’s seat.

Not all board members understand this. Some feel the need to manage the CEO and the entrepreneurs. Others can’t help but get involved in minutiae stir up conflict, and try to solve problems that they see emerging. This type of board member behavior gets in the way of the functioning of the company, confuses the management team, and, in the worst cases, damages the startup.

Constructing a good board starts with identifying investors and board members who understand the world of startups, know the dynamics of your market, and bring unique positive attributes that are often much more important than money. Founders, especially early in the life of a company, often feel like they have to make trade-offs to take money when it’s available, rather than patiently seeking the right investor for their startup. Being patient is worth it—ultimately having the right personalities will help make the journey of a startup CEO easier.

Boards can significantly impact the trajectory of a startup. A great board is a mix of intellect, experience, personalities, ego, emotions, and aspirations that, when combined correctly, can be a strong net positive experience for the company. It can be magical when a diverse set of experiences among board members—including product development, business strategy, financial expertise, general management skills, and broad network reach—are joined effectively. In contrast, when the ingredients don’t mix well, it can be a disaster.

Your board is your inner sanctum and your strategic planning department.³ The board guides, engages regularly, and builds a deep relationship with the CEO. But it is not simply a friendship—the board expects results and accountability. Value creation is a cliché in a startup’s vocabulary, but if a CEO ignores the goal of building a valuable business, boards, especially those loaded with investors, will often turn against a CEO.

In this book, we’ll talk about how to construct the board, lead and manage it, and deal with conflicts when they arise. We’ll also help you understand how to get the most out of your board and how to address things when they aren’t working. While a great board can be a guidepost and a positive catalyst, a bad board can cause angst and frustration, destroy value, and occasionally kill a company. Don’t ever forget the cliché success results from the entrepreneur, failure belongs to the board.

Who This Book Is For

Our goal with the books in the Startup Revolution series (http://startuprev.com) is to help any entrepreneur, regardless of experience, location, or type of company. While we’ve written this book with the first-time entrepreneur in mind, we believe each book in the series applies to entrepreneurs with any level of experience. Having a beginner’s mind often helps you learn new things. If you are an experienced entrepreneur, we hope this is one of those cases.

We’ve also written this book for board members. Over the past 20 years, we’ve encountered and worked with thousands of board members covering a wide range of experiences. While a few of these board members were spectacular and had a dramatic, positive impact on the trajectory and outcome of the company, many were average and had a neutral or insignificant impact. Others were detrimental. We’ve learned a lot from all of these experiences—both good and bad—and have tried to incorporate this learning into this book in a way that is helpful to any board member regardless of experience.

This book is also for management teams. Most management teams are directly exposed to the board and interact with them on a regular basis. This can be extremely helpful or completely disruptive. The responsibility of a successful relationship between board members and members of the management team belongs to both the board members and the management team. As a result, we think every executive in a startup company can benefit from this book.

Throughout this book we’ve incorporated the advice of many investors, board members, entrepreneurs, and executives whose views we respect. We’ve used stories and examples that emphasize certain points. We give plenty of advice and provide tools for implementing this advice. However, we are still learning, so we’ll continue to write about our experience, new experiments, and things we learn on the Startup Revolution web site at http://startuprev.com.

Magic Words, Phrases, and Abbreviations

Having written several books, we’ve come to learn how important it is to be precise with certain words and phrases. This book was particularly tricky given the different roles participants play in a board, so we’ll define a few right now. Our goal, as with everything we do, is inclusiveness, so you should err on the side of a broader definition when you encounter a magic word, unless we specify otherwise.

Entrepreneur and founder: We use these two words interchangeably. To us, they mean the same thing.

CEO: The CEO can be one of the founders, but doesn’t have to be. Occasionally, we’ll refer to founder/CEO when this is an important distinction.

Angel investor: We include friends and family and seed investors in the definition of an angel investor. So when you see angel investor, you know we are talking about the early investors in a company who are investing their own money. We do not ever include seed VCs in this category, although the angel investors could be the seed investors.

VC: We often abbreviate venture capitalist as VC. It takes the word count down significantly and is a lot more readable.

Board: We’ll start abbreviating board of directors as board. There’s that word count thing again.

Chair: While chairman of the board sounds serious and weighty, there are plenty of chairwomen. We prefer to use chair since it’s gender neutral.

We’ve written this book together. While we each have a different set of experiences, we felt it would be more effective to use one voice. We’ll often refer to one of us in the third person; if you’ve read the book Startup Life: Surviving and Thriving with an Entrepreneur that Brad wrote with his wife, Amy Batchelor, you are already used to this approach.

Okay, let’s get started.

Notes

1. Joseph Schumpeter, an economist, coined the term creative destruction to describe the forces of entrepreneurship and innovation. Growth occurs out of the destruction of previous economic order. As Brad likes to say, creative construction is really what is happening.

2. Fred Wilson, www.avc.com/a_vc/2012/03/the-board-of-directors-role-and-responsibilities.html

3. Brad Feld and Jason Mendelson, Venture Deals: Be Smarter Than Your Lawyer and Venture Capitalist (Hoboken, NJ: Wiley, 2011), 61.

Chapter Two

What Is a Board?

Cooley LLP partner Eric Jensen, who represents companies like LinkedIn and Adobe, describes corporate governance as processes, customs, policies, and laws affecting the way a corporation is directed, administered, and controlled. He goes on to say, While local state laws are important, the right processes and policies are of equal or greater importance. Many companies just get going and assume that the right practices will develop.

A board of directors has a set of formal duties, which are often referred to as corporate governance. They include legal concepts such as duty of care and duty of loyalty as well as committees such as the audit, compensation, and nominating committees. While startup boards should be nimble, it is useful to understand the formal requirements.

As a startup grows, the number of stakeholders increases. At the time of its inception, a startup may have a small team, often just the founders. A few early employees are added and given stock options. A seed round is completed, which adds a few angel investors. The company releases its product; customers and suppliers become stakeholders in the startup. More employees are added, and a venture capital round is completed. Soon, you have a number of differing interests, some short term and some long term, related to the company. At times, these interests conflict with each other. The board ultimately is responsible for navigating any conflicts that arise.

Rather than defaulting into whatever processes start to happen, excellent founders focus early on putting a structure in place to ensure that the board develops governance policies and procedures to minimize conflicts of interest and maximize shareholder value. Good boards invite counsel to participate in meetings to ensure that best practices are being followed. While entrepreneurs are rightfully concerned about racking up legal fees in such situations, Eric Jensen states, Just as a VC is focused on building the company using best practices, a good attorney does not focus just on legal aspects. We act as advisers first; we sit in such board meetings for free and alert the CEO to any warning signs we spot in these board meetings.

Developing a code of conduct that establishes the ground rules of behavior, especially under conflicting circumstances, is helpful at this stage. More often than not, short-term challenges trounce the need for preparing such a code. However, when you do take the effort to prepare such a document, it establishes the ground rules and can be incredibly helpful, especially when conflicts arise.¹

Value Creation, Accountability, and Transparency

One of the primary roles of a board is to ensure that the interests of all the shareholders are being considered. In many startups, the primary shareholders and board members are often the same, consisting of the founders, CEO, and investors. As companies grow and develop, outside board members, who aren’t involved in the business and don’t have a significant economic stake, get added. Collectively, this group is responsible for considering and balancing the interests of all the shareholders.

In addition to working to maximize the value of an economic outcome, the board also ensures accountability and transparency. In a formal sense, the CEO presents the ongoing progress of a company and gives a periodic account of the business operations to the board. It is then the board’s responsibility to establish appropriate procedures, set milestones, and assess performance. Transparency ensures that all actions of the CEO and the board are conducted based on factual information with sound judgment and the interests of all shareholders in mind.

Functionally, the CEO works for the board. Graphicly CEO Micah Baldwin states, As soon as you raise money, it’s no longer your company—you are now working for somebody else. If you don’t perform, you will get fired. If I don’t get fired, then I know I’ve had a good board meeting. This reminds me every month of my responsibilities.

As a board member, a venture capitalist (VC) needs to act in the interest of the company, representing all shareholders, rather than their narrow interest as an investor. This is often a difficult conflict for an investor to manage, and you’ll often hear VCs qualifying their statements in a board context using phrases such as I’m wearing my investor hat now. But as August Capital partner Andy Rappaport says, I have a test I use. Can I explain my decision as reasonable and fair to any shareholder group, not just my own?

Legal Duties of a Board Member

The state laws in which the company is incorporated along with the company’s charter documents (the articles of incorporation, bylaws, and shareholder rights) establish the legal duties of a board member. For public companies, the Securities and Exchange Commission (SEC) adds some bonus rules.

A fiduciary duty is an obligation of a board member to act in the best interest of another party. Every board member has a fiduciary duty to the shareholders. A fiduciary duty is the highest standard of care, and a fiduciary is expected to be extremely loyal to the